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Budget 2019: Government Steps Up Rural Spending, Gives Tax Relief

However, bond yields spiked amid worries over the fiscal slippage and the government's borrowing plans.
However, bond yields spiked amid worries over the fiscal slippage and the government's borrowing plans.

The government pledged Rs 75,000 crore ($10.56 billion) to support poor farmers and reduced the tax burden for the middle class on Friday, as it looked to rally support from voters with the final budget before a general election. Heading into polls that must be held by May, Prime Minister Narendra Modi is facing discontent over depressed farm incomes and doubts over whether his policies are creating enough jobs.

And with opinion polls suggesting that the ruling Bharatiya Janata Party (BJP) could lose its parliamentary majority, the government delivered a budget to shore up support in the countryside, where two-thirds of the country's population live, and among the urban, salary-earning middle class.

The interim budget for 2019/2020 offered direct cash support of Rs 6,000 to 120 million poor farmers and allocated more funds for a rural jobs guarantee scheme and rural development, like building roads and homes.

Vying with an opposition that has also trumpeted budget-straining populist measures to support from poorer voters, the government said it would launch a pension scheme for workers in the unorganised sector, which employs some 420 million people.

The budget proposals also reduced the burden for the lower middle class, by exempting people earning up to Rs 500,000 from income tax from an earlier cap of Rs 250,000.

Still, the measures announced on Friday were aimed at putting money into pockets quickly.

"This is not just an interim budget, this is a vehicle for the developmental transformation of the nation," Finance Minister Piyush Goyal told the lower house of parliament.

"India is solidly back on track and marching towards growth and prosperity," said Mr Goyal, who delivered the budget in place of Union Minister Arun Jaitley, who was in the United States for medical treatment.

India was expected to expand 7.2 percent this fiscal year, Mr Goyal said, keeping its slot as one of the world's fastest growing major economies.

But a report in the Business Standard daily the previous day belied the government bullishness over the economy. It said that the government has been withholding an official survey that the country's showed unemployment rate at its highest in decades.

Garima Kapoor, an economist at Elara Capital investment bank in Mumbai, said the budget favoured farmers, older voters, workers in the unorganised sector, small and medium sized businesses and middle class families.

"The budget is clearly farm-focused, with the elections in mind," Mrs Kapoor said.

The interim budget for 2019/20 allocated Rs 60,000 crore for a rural jobs programme and 190 billion for building of roads in the countryside.

Slippage

The big giveaways resulted in fiscal slippage, for a government that has been seeking to drag down its deficit.

The budget would put the fiscal deficit for the year ending on March 31 at 3.4 per cent of gross domestic product (GDP), slightly higher than the targeted 3.3 per cent.

Mr Goyal set a deficit target of 3.4 per cent for 2019/20, instead of the earlier target of 3.1 per cent, but he went onto project the deficit would come down to 3 per cent in both of the following two years.

"Overall, the government presented an expansionary budget and prioritised populism over fiscal prudence," analysts at investment bank Nomura said in a note, calling it an election budget.

Fiscal slippage also drew a warning from credit rating agency Moody's Investors Service.

"Taken together, it doesn't really bode well for their medium-term fiscal consolidation targets," said Gene Fang, associate managing director at Moody's sovereign risk group. "From that perspective we would say, on balance, it's credit negative."

But Mr Fang said the budget announcements did not change the rating agency's stance on India. Moody's rates India at "Baa2" with a "stable" outlook.

Analysts were skeptical about the government's ability to even meet its upwardly revised fiscal deficit targets for the ongoing and upcoming fiscal year, noting that the government's revenue projections, especially from the goods and services tax (GST) seem optimistic.

"Their revenue estimates seem to be optimistic, particularly on the GST front, which the government is budgeting at about 18 per cent growth rate," said Shashank Mendiratta an economist with IBM in New Delhi, adding that forecast looked "very aggressive."

Bond yields spiked amid worries over the fiscal slippage and the government's borrowing plans. The benchmark 10-year bond yield rose 14 basis points to 7.62 per cent, while the rupee traded at 71.26 against the US dollar, about 17 paise weaker than its close on Thursday.

The country's stock markets gained, however, on expectations that the budget would boost consumption. The broader NSE index closed up 0.6 per cent at 10893.65.